10/24/24 Roundup: Gold, 'Good' Volatility, & the Bitcoin Epoch
Onramp Weekly Roundup
Written By Mark Connors & Brian Cubellis
Before we get started…
Last week, we released a new report, the first installment of a three-part series, “Bitcoin: The Emergent Asset Class Has Arrived.”
Download the full report here:
Part I: Bitcoin Boosts Returns & Dampens Volatility in Traditional Portfolios
This first installment is an empirical study of bitcoin’s ability to enhance both absolute and risk-adjusted returns for an otherwise traditional 60% equity / 40% bond portfolio (60/40).
If you want to learn more about multi-institution custody and its benefits for securing bitcoin for generations — connect with Onramp.
And now, for the weekly roundup…
Mark Connors’ Macro Corner…
- Gold, ‘Good’ Volatility, & the Bitcoin Epoch
Chart of the Week…
- High-Yield Savings Accounts Are Misleading
Quote of the Week…
- Paul Tudor Jones on Inflation
Podcasts of the Week…
- The Last Trade / Final Settlement / Wake Up Call
Gold, 'Good' Volatility, & the Bitcoin Epoch
Gold hit another new all-time high of $2,748 this week, lifting the YTD gain to 32.5%. If gold were to finish the year here, it would be the best YTD gain since gold’s largest YTD gain in 1979 of 119.5%.
But it is not today’s absolute price gain for gold that gets our attention, rather it is the similarities in the price and volatility patterns that both gold and bitcoin share that we see as the key insight. See our report on bitcoin’s unique volatility and how it can enhance returns in a traditional 60/40 portfolio here.
In the 1970s, gold’s volatility increased from 4% to over 80% as its price rose. This ‘good’ volatility (i.e. more upside ‘surprises’) occurred as gold entered a period of price discovery in a market unfamiliar with the yellow metal NOT being pegged to the US Dollar. This pattern of upside surprises as measured by ‘good’ volatility, is something we see today in bitcoin, as discussed in Monday’s ‘Wake Up Call’ series with Fidelity Digital Asset’s Director of Research, Chris Kuiper, and Onramp CIO, Jesse Myers. Excerpt here, full video here.
Gold has had four major rallies since Nixon broke the USD peg to gold in August 1971:
- 1970s: The first was the largest, when gold’s price rallied from $35 in 1970 to over $550 by the decade’s end, up over 1,400%.
- 2000s: Through the Global Financial Crisis from 2004 to 2011, gold gained over 350%.
- 2020-2022: Gold rallied over 60% as debt funded stimulus was unleashed globally in reaction to Covid.
- 2024: Gold is up over 32% YTD, perhaps on debt and deficit concerns as the Congressional Budget Office’s (CBO) U.S. deficit estimate for 2024 increased mid-year by 25%.
In the first segment of our three-part series, “Bitcoin: The Emergent Asset Class Has Arrived”, our Annex shares events and innovations that helped define the two financial epochs of the post WWII era, with the 2008 Global Financial Crisis marking the divide.
Below we share the price of gold, since, like bitcoin, gold’s price has been sensitive to increases in federal debt, deficits, and the global money supply.
source: Onramp, Koyfin
The Bitcoin Epoch
Gold has been getting headlines for good reason. As mentioned, its YTD price level is at a multi-decade high and it has been a proven store of value throughout time. But its ability to act as a medium of exchange and unit of account have faded as the economy has migrated to the internet.
The chart below shows how gold’s annualized returns have increased faster than the S&P 500’s, to where gold’s YTD gains now exceeds the S&P 500’s and the NASDAQ’s.
But bitcoin’s return dominates over all three time periods below. We believe this is because bitcoin is in a ‘price discovery’ phase. Like the period in the 1970s for gold after Nixon ‘suspended temporarily’ the conversion of dollars for gold, bitcoin is in a period of ‘price discovery’ that will likely result in continued higher volatility than established assets, but like gold, much of that volatility is ‘good’ or a result of upside surprises.
Where gold’s price discovery was due to the USD break from gold, bitcoin’s price discovery may be due to the increasing pace of debt and deficits that bring with it asset inflation and loss of buying power.
Of all the scars left on the fiscal body of the U.S. after the 2008 GFC, the level of debt is the most visible and lasting. The below graph shows annualized changes of the rolling 3-month levels of debt in the U.S. The spikes in 2008 and 2020 correspond to the jumps in the price of gold noted above. Today’s 10% annualized increase is modest by comparison. So why the recent jump in gold?
Fiscal dominance.
The combination of higher debt loads (US debt to GDP is 122%, the highest since WWII) and rising interest expense, has put the federal government in a bit of a pickle, layman’s speak for fiscal dominance. Essentially, the only way to keep up with mandatory spending is to increase the debt load.
Like gold in the 1970s, bitcoin’s volatility is in the mid, sometimes high double digits, and deemed TOO high by some investors, even though its compound annual growth rate is 60% over the past decade.
Gold has started to move, while bitcoin remains in a consolidation pattern (roughly flat over the past ~7 months), still below its March 2024 peak of $73,400, as per the Onramp Terminal.
But as Onramp CIO Jesse Myers pointed out last week, gold often leads bitcoin.
Chart of the Week
“High-Yield Savings Accounts are misleading.” — River
Quote of the Week
“All roads lead to inflation…I’m long gold, I’m long bitcoin…I’d own zero fixed income…the playbook to get out of this is that you inflate your way out.”
Podcasts of the Week
The Last Trade E070: Bitcoin is the Real Hurdle Rate with Richard Byworth
In this episode of The Last Trade, Richard Byworth, Managing Partner at Syz Capital & Board Member at Relai, joins to discuss bridging TradFi to bitcoin, bitcoin as the real hurdle rate, adoption in Switzerland, building on a bitcoin standard, & more.
Final Settlement E015: The Common Language of Lightning with Roy Sheinfeld
In this episode of Final Settlement, Roy Sheinfeld, Co-founder & CEO of Breez Technology, joins the pod to discuss Lightning Network infrastructure, commercial applications & UX, the vision of Breez Technology, Lightning as a common language, SoV vs. MoE, & more.
Wake Up Call (10.21.24): Why BTC’s Volatility is Uniquely Desirable with Chris Kuiper & Jesse Myers
In this episode of Wake Up Call, hosts Rich Kerr & Mark Connors are joined by Chris Kuiper, Director of Research at Fidelity Digital Assets, & Jesse Myers, Onramp’s Co-founder & CIO, to discuss the notion that bitcoin’s volatility is uniquely desirable—a small allocation can boost returns while dampening volatility.
Closing Note
Onramp provides bitcoin financial services built on multi-institution custody. To learn more about our products for individuals and institutions, schedule a consultation to chat with us about your situation and needs.
Find this valuable? Forward it to someone in your personal or professional network.
Until next week,
Mark Connors & Brian Cubellis